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No 'crowding out' seen in China's T-bond sales plans
(Xinhua)
Updated: 2009-03-18 10:11 China plans to offer several hundred billion yuan in treasury bonds this year to finance its record fiscal deficit and massive government economic-stimulus program, a debt plan that's raising concern about possible "crowding out" of private-sector borrowers and investment.
Further, a higher volume of treasury sales might be welcomed by the investing public, with whom the T-bills are a popular alternative to low-yielding bank deposits and a volatile stock market. China plans 950 billion yuan ($139 billion) in treasury bill sales, of which 200 billion will be issued on behalf of local governments, to fund the record fiscal deficit and spur growth amid the global slowdown. The actual number could be more than one-third higher. The Central T-bond Registration and Settlement Co Ltd (CTRS), the depository house for China's major bonds, forecast in a report in January that total government debt issues would exceed 1.3 trillion yuan this year, a rise of 60 percent from 2008. No crowding out Economic theories say that a large influx of treasury bonds will push up market interest rates, or the borrowing costs for individuals and institutions. As a result, the private sector will find it too costly to borrow and scale back investment, thus impeding economic growth. But professor Zhu Qing of the School of Finance at Renmin University of China said: "The 'crowding out' effect has a precondition: that the market has a pressing need for money, which is not a reality among all Chinese enterprises." Bank lending has ballooned this year, with new loans exceeding 2.69 trillion yuan in the first two months. In January alone, lending nearly doubled from a year earlier. But not much of that money is expected to go into long-term investment, since bill financing with 180-day maturities comprised nearly half of the new loans. Zhu noted as well that part of the new lending was intended to finance projects linked to the 4-trillion yuan stimulus package, in answer to the government call for more credit support for infrastructure construction. "Profitable large enterprises don't have an urgent need for money. As for small ones, they don't have an appetite to borrow as declining demand has dampened their desire to expand production," according to Zhu. As the global slump has deepened, China, with the world's third-largest economy, has seen external demand weaken and domestic spending stall. Exports, which contributed more than 20 percent to gross domestic product (GDP) growth, plunged 25.7 percent year-on-year in February, the worst performance in a decade. It was the fourth month of decline in a row for exports. Domestic consumption has also been soft. Retail sales grew only 15.2 percent in the first two months to 2 trillion yuan. The figure was lower than the 20-percent-plus increase a year earlier, the National Bureau of Statistics (NBS) said last Thursday. Zhu said the inadequate social safety net constrains individuals' spending. Rather, they save against unemployment and other problems. "Under such conditions, not all Chinese enterprises have the drive to borrow to enhance production. No demand, no supply," He said. He said that even with huge government bond sales, interest rates were unlikely to edge up, and the "crowding out" effect on private investment would not occur, he said. "Interest rates rise only when money becomes scarce," Zhu explained. Low rates an opportunity Low rates meant it was an opportune time for the government to issue debt cheaply, said Zhu. The People's Bank of China (PBOC), the country's central bank, has cut interest rates five times since September to spur growth. Low rates might even make it possible for more companies to issue bonds now, regardless of the government's plans, said Liu Yuhui, researcher with the institute of finance of the Chinese Academy of Social Sciences. He noted the increased corporate bond issues could help companies diversify their funding sources and allow banks to diversify their risks. "As money for treasury bill purchases mainly comes from deposits held by individuals and institutions, overall money supply remains steady, so there won't be inflationary pressure," he said. Limited market impact China's treasury bond sales averaged 760 billion yuan a year from 2004 to 2006, while the country was pursuing "prudent" monetary policy to cope with an overheated economy. Treasury bond issues jumped to 2.35 trillion yuan in 2007, but that was because of a 1.55 trillion yuan special bond issue to sterilize excess bank liquidity. Without that special issue, sales would have been about 800 billion in 2007. Sales totaled 812.5 billion yuan last year as the economy began to cool and liquidity declined. Can the market absorb this year's bond sales, which could total as much as 1.3 trillion yuan? Data from the PBOC last week showed that deposits held by individuals and institutions totaled 4.98 trillion yuan by the end of February. "The planned treasury bond sales value would be equal to 26 percent of deposits, so it won't be difficult for Chinese banks to underwrite those bonds," said Bai Jingming, an economist with the Ministry of Finance. Premier Wen Jiabao said in the government work report to the annual legislative session on March 5 that up to 5 trillion yuan of new loans would be offered this year to support investment and revive the economy. The target was 50 percent higher than that for last year and somewhat more than the 4.9 trillion yuan of actual loans in 2008. Given that lending was 2.6 trillion yuan in just the first two months of this year, it's quite likely that full-year lending will vastly exceed the target. "Ample liquidity means it will be easy for Chinese banks to deal with hefty bond sales hitting the market," said Bai. Institutions dominate The "Big Four" state-owned commercial banks underwrite most of the government bonds. Most bonds are held by banks, insurance companies, securities firms and corporations in China. The bonds trade in a variety of secondary markets including the exchange market, the over-the-counter market and the inter-bank market where 95 percent of the transactions are made. The inter-bank market dominates because of a ban imposed in 1997 on banks' trading of bonds on exchanges. The ban followed cases of banks illegally channeling bond-market repurchase agreement funds to the stock market. That ban was partially lifted in January, when regulators decided to allow listed commercial banks to trade bonds on exchanges for a trial period of unspecified length, China's bond market value was about 7.06 trillion yuan last year, CTRS data show. The market is expected to contract in 2009 to 4.5 trillion, despite the anticipated rise in treasury issues, because the PBOC will cut its note issues by about 70 percent. The central bank, like the treasury, issues debt to reduce liquidity. But with a slowing economy, the PBOC was unlikely to need to do so this year, according to the CTRS. Of total new issues this year, treasury bills and central bank notes would comprise about 51 percent, according to CTRS. Financial bonds (those issued by state-controlled banks) would account for 26 percent of new issues. Corporate bonds and short-term corporate financing bills would comprise the rest. Corporate bonds marginal Government bonds and central bank notes have dominated China's debt market for years, while the role of corporate bonds has been marginal, said Yang Zhiyong, researcher with the Chinese Academy of Social Sciences. There were many reasons for this situation, he said. Yang said the corporate bond portion of the market was hampered by the segmented regulatory system, not the volume of treasury bill sales. Two government agencies are involved in approving corporate bond issues, the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission (CSRC). Further, many Chinese investors consider corporate bonds too risky. "It takes time for people to realize that corporate bonds actually offer more stable returns than the stock market," said Yang. In contrast, treasury bonds are a favorite for risk-averse investors, especially during equity bear markets of the severity seen in the past 18 months. Individuals often line up for hours outside banks, the only place they can buy treasury debt, only to find the bills are sold out. Interest rates for this year's treasury debt, with three- to five-year maturities, are 0.4 percentage points higher than for fixed deposits at banks. Eye on debt "Even though the deficit expansion is in a safe range, we should be wary of risks from a continuous debt expansion," Bai warned, because there might be more years of high deficits ahead. Based on experience, China's "pro-active" fiscal policy and associated deficits could be expected to last for several years, said Bai. He noted that after the Asia crisis, a pro-active fiscal policy led to three years of budget deficits. "A large deficit is predictable at least three years ahead and the actual deficit for 2009 is set to be higher than the amount forecast in the budget," he said. The government should carefully consider borrowing costs, as it could not rule out the possibility of interest rate rises in the future, he said. (For more biz stories, please visit Industries)
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